30 Mar, 2019 at 09:56 | Posted in Statistics & Econometrics | Comments Off on Significance testing and the real tasks of social science

After having mastered all the technicalities of regression analysis and econometrics, students often feel as though they are masters of the universe. I usually cool them down with required reading of Christopher Achen’s modern classic Interpreting and Using Regression. It usually gets​ them back on track again, and they understand that

no increase in methodological sophistication … alter the fundamental nature of the subject. It remains a wondrous mixture of rigorous theory, experienced judgment, and inspired guesswork. And that, finally, is its charm.

And in case they get too excited about having learned to master the intricacies of proper significance tests and p-values, I ask them to also ponder on Achen’s warning:

Significance testing as a search for specification errors substitutes calculations for substantive thinking. Worse, it channels energy toward the hopeless search for functionally correct specifications and diverts​ attention from the real tasks, which are to formulate a manageable description of the data and to exclude competing ones.

RCTs treat social reality as though some simulacrum of laboratory conditions was a feasible and appropriate scientific method to apply, but in development research, unlike laboratory condition treatments, interventions are not manipulations of individuated and additive or simply combinable material components … but rather intervention into material social relations. While for the former, assuming away or stripping away everything other than a given effect focus can reveal the underlying invariant mechanics of that effect, in the latter one cannot take it as given that there is an underlying invariant mechanics that will continue to apply and one is just as liable to be assuming or stripping away what is important to the constitution of the material social relations … As such, RCTs may make for poor social science, because the approach is based on a mismatch between the RCT procedure and the constitution of reality under investigation—including the treatment of humans as deliberative centers of ultimate concern. In any case, technical sophistication is no guarantor of appropriately conceived “rigour” if the orientation of methods is inappropriate …

Morgan’s reasoning confirms what yours truly has repeatedly argued on this blog and in On the use and misuse of theories and models in mainstream economics — RCTs usually do not provide evidence that the results are exportable to other target systems. The almost religious belief with which its propagators portray it, cannot hide the fact that RCTs cannot be taken for granted to give generalizable results. That something works somewhere is no warranty for it to work for us or even that it works generally.

It probably shouldn’t worry us if some pocket of the population saw a decline in IQ as things like education and diet affect IQ and these factors can vary from one group or time to another. But according to this new study it doesn’t appear to be some small segment of the population whose IQ is going down. It appears to be the entire nation of Norway.

When scientists from the Norway’s Ragnar Frisch Centre for Economic Research analyzed some 730,000 IQ tests given to Norwegian men before their compulsory military service from 1970 to 2009, they found that average IQ scores were actually sinking. And not just by some miniscule amount. Each generation of Norwegian men appear to be getting around seven IQ points dumber.

That’s pretty horrifying news for fans of progress, but it also begs one incredibly important question: Why? What’s causing IQ scores to start heading in the wrong direction?

Some have proposed that our tech obsession might be to blame, but as the decline started in the 1970s, well before everyone spent their days staring at screens, that can’t be the whole story.

Other proposed explanations are unhealthy modern diets, increasingly trashy media, or a decline in the quality of schooling or the prevalence of reading …

The bottom line, however, is that the cause of the decline remains a mystery. Whatever it turns out to be, however, we should all probably start worrying about what our sedentary, screen addicted, junk food-munching lifestyles might be doing to our brains.

“The EBM (The Swedish Economic Crime Authority) can confirm media reports relating to the fact that action is being taken at Swedbank’s headquarters​,” the authority wrote on its Twitter account.

“The action is being carried out by police officers from the EBM’s financial market chamber at the request of chief prosecutor Thomas Langrot in connection to the ongoing investigation into Swedbank.”

Several Swedish media had earlier reported that a raid was under way at Swedbank’s office in Sundbyberg in the north of Stockholm.

An investigation by Sweden’s public broadcaster earlier this year alleged that Swedbank may have been used for the laundering of billions of kronor over a period of several years.

In late February, the EBM announced that it would be opening a preliminary investigation into Swedbank relating to unauthorized disclosure of insider information.

Sweden’s Financial Supervisory Authority (FI) also launched an investigation into what it called the “very serious” allegations against the lender, in collaboration with the equivalent authority in Estonia, since many of the suspicious transactions took place in the Baltic states.

Swedbank’s share price dropped by more than seven percent after trading opened in Stockholm on Wednesday morning.

Sweden now has so little debt that many are starting to wonder why the government isn’t spending a lot more …

The biggest Scandinavian economy, which relies on global trade for about half its output, is slowing down. But the government has so far appeared reluctant to use its fiscal leeway to fight that trend. That’s drawn criticism from analysts, with some even referring to the government’s penny pinching as a form of “insanity.”

Swedish government debt is at its lowest in 40 years and falling. According to the National Financial Management Authority, debt will sink below 35 percent of gross domestic product this year and breach 30 percent in 2021. At that point, the government will be required by law to explain to parliament why debt is so low.

Today there seems to be a rather widespread consensus of public debt being acceptable as long as it doesn’t increase too much and too fast. If the public debt-GDP ratio becomes higher than X % the likelihood of debt crisis and/or lower growth increases.

But in discussing within which margins public debt is feasible, the focus, however, is solely on the upper limit of indebtedness, and very few ask the question if maybe there is also a problem if public debt becomes too low.

The government’s ability to conduct an ‘optimal’ public debt policy may be negatively affected if public debt becomes too small. To guarantee a well-functioning secondary market in bonds it is essential that the government has access to a functioning market. If turnover and liquidity in the secondary market become too small, increased volatility and uncertainty will, in the long run, lead to an increase in borrowing costs. Ultimately there’s even a risk that market makers would disappear, leaving bond market trading to be operated solely through brokered deals. As a kind of precautionary measure against this eventuality, it may be argued – especially in times of financial turmoil and crises — that it is necessary to increase government borrowing and debt to ensure – in a longer run – good borrowing preparedness and a sustained (government) bond market.

No matter how much confidence you have in the policies pursued by authorities nowadays, it cannot turn bad austerity policies into good job creating policies. Austerity measures and overzealous and simple-minded fixation on monetary measures and inflation ​are not what it takes to get our limping economies out of their present-day limbo. They simply do not get us out of the ‘magneto trouble’ — and neither does budget deficit discussions where economists and politicians seem to think that cutting government budgets would help us out of recessions and slumps. In a situation where monetary policies have​ become more and more decrepit, the solution is not fiscal austerity, but fiscal expansion!

We are not going to get out of the present economic doldrums as long as we continue to be obsessed with the insane idea that austerity is the universal medicine. When an economy is already hanging on the ropes, you can’t just cut government spendings. Cutting government expenditures reduces aggregate demand. Lower aggregate demand means lower tax revenues. Lower tax revenues mean​ increased deficits — and calls for even more austerity. And so on, and so on …

Visiting​ Stockholm yours truly, of course, takes the opportunity to spend some time with a ​daughter who lives there (after having graduated from the Stockholm School of Economics and now working in the finance sector). Picture taken eighteen years ago at our summer residence.

There is no limit to the amount of financial assets the ECB can buy. In principle, it could purchase all existing financial assets (all bonds and shares, for example) … There is also no restriction on what types of assets the ECB can buy … It could replace the old bonds with new ‘environmental bonds’, issued to finance environmental projects.

The bottom line is that it is perfectly possible for the ECB to use the instrument of money creation to favour environmental investments without endangering price stability …

Given the existential threat of the degradation of the environment, including climate change, the priority should be to use the ECB’s money-creation capacity towards the support of environmental projects. This can be done without creating inflation.

So now we are eagerly awaiting the Krugman-Summers-Rogoffs denouncing this proposal as “dangerously wrong.” In the scientific world,​ it doesn’t matter who says​ what. So, if MMTers propose central banks to buy ‘green bonds’ that must be evaluated the same way as when a renowned mainstream professor at the LSE’s European Institute says so. Or …?

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